WHY $90 MILLION CLICK FRAUD SETTLEMENT WORKS FOR GOOGLE

Only Lawyers Will Get Cash, Advertisers Get Make Goods

NEW YORK (AdAge.com) -- In agreeing to pay out $90 million to advertisers in a legal settlement over click fraud, Google gets off easy. The settlement, still contingent on getting the judge’s approval, is a result of a class action lawsuit on behalf of all advertisers who have taken part in Google’s AdWords program since it began in 2002.

If approved, advertisers would be able to apply for reimbursement for invalid or fraudulent clicks that occurred since 2002. But Google would be able to reimburse the advertisers in the form of make-good advertisements. The only cash payouts would go to the lawyers.

A win for Google
Experts point out that advertisers lose about $1 billion a year in clicks to their sponsored links that are either invalid for from competitors or revenge-seekers hoping to cost the advertisers more money. In search engines’ pay-per-click model, an advertiser pays each time someone clicks on their link. “If the extent of the liability to Google is just $90 million, that’s a tremendous win for Google,” said Jeffrey Rohrs, and attorney and president Optiem, an Internet marketing firm.

And it improves Google’s public relations. “The issue of click fraud has to be a drag from stockholders worried about how this will affect Google,” said Eric Goldman, assistant professor of law, Marquette University Law School, recalling how George Reyes, Google’s chief financial officer, said last year that click fraud is the “biggest threat to the Internet economy.”

“With the settlement, that drag gets eliminated -- and it gets eliminated for $90 million, only a small amount of which will be in cash,” Mr. Goldman added. “What a cheap way to solve a thorny problem.”

Lead plaintiff
Steven F. Malouf, the principal at the law firm representing the lead plaintiff, Lane’s Gift and Collectibles, defended the payout. He pointed out that advertisers sign a contract with Google saying they will pay for every click, and agreeing that Google exercises good faith and reasonable efforts to detect click fraud. “Within the context of the contract, it’s a very reasonable settlement,” Mr. Malouf said.

In a statement Google sent out to its AdWords customers, the search giant pointed out that there is no industry-accepted definition of the term “click fraud,” and it refutes industry data that indicates the extent of the problem. “Fighting invalid clicks aggressively is in Google’s best interest and essential for us to maintain a viable business,” the statement read.

Mr. Malouf declined to detail any additional terms of the settlement. But, he said, “one of the things you’ll see in the next 12 months is third-party analytics -- the analysis of that click-through done by a third party.”

According to a new report by online market research firm eMarketer, paid search will continue to be the dominant form of online advertising, at around 40% share of the $12.5 billion online ad market. Paid search ad spending in the U.S. will top the $10 billion mark in only three years, by 2009. And, 69% of advertisers use paid search for branding.

What is really in question is the long-term viability of the pay-per click model, Internet insiders said. “I can’t think of any other ad model where there is no fiscal disincentive for someone to commit fraud,” Mr. Rohrs said. “Now we have a model that is action-based, not on a conversion, but on a click. It is very susceptible to activist backlash, economic backlash and revenge.”

The legal settlement will not be finalized until a judge approves the agreement between Google and Lane’s Gift next month. The suit was filed last April in Arkansas Circuit Court.

Others named in suit
Meanwhile, the other mega-search engine Yahoo, which is named in the suit along with the smaller search engines Looksmart, Findwhat, Miva, AOL and Netscape, has not settled. “We stand firmly by our proprietary click protection system and look forward to vigorously defending our position in this matter,” the company said in a statement.